During the last century and a half, average world income grew tenfold, the composition of output and relative factor returns shifted, and globalization occurred. Consumption per person has grown over time, but more slowly than GDP per capita, as the share of private consumption declined, although this was partly offset by the rising share of public consumption. Income inequality within countries fell from the early to the late twentieth century and has risen in recent decades. Living standards improved across the world, but the gap between the West and the Rest increased, and between-country inequality widened over time until the 1990s, when the trend reversed. Among world inhabitants, income distribution has followed a similar trend, with inequality increasing up to 1990 and declining in the twenty-first century. Impressive long-run gains in human development have taken place in the world without being interrupted by the economic slowdown and globalization backlash during 1914–50.

This chapter provides an overview of the Chinese economy during 1850–2000 with both a quantitative profile and a period-by-period narrative on major eras of the late Qing, Republican and communist periods (including both the Mao era and the post-1978 reform period). More specifically, the chapter raises the question not only of why China fell behind, but more importantly why it took so long for China to industrialize after the Industrial Revolution had been well under way elsewhere. To this end, I highlight the importance of institutions and ideology, and their interaction in a feedback loop, as critical elements accounting for the remarkable transformations as well as much inertia during this 150 years of the Chinese response to Western or modernization challenges.

Impressive gains in global life expectancy and education from 1870 to 2010 are documented. Life expectancy increased from thirty years in 1870 to seventy-one years in 2010, while an increasing number of children have attended schools and acquired formal education. The key factors responsible for these improvements are identified. Although economic growth and development increased worldwide, income has never been the main driver of life expectancy. Rather, the gains in survival came from public health efforts, medical innovations, and expanding public education. While income and schooling are no doubt positively related, the role of public funds in increasing mass education is also highlighted. The high economic returns to education are documented and then an explanation sought for why the whole world is not more educated, given the large economic returns to education. The divergence in income per capita across the world is contrasted with the relative convergence in human capital.

This book tells the story of the beginnings of modern economic growth, or the sustained increase of per capita incomes together with population growth, surely one of the most important developments in world history. Part I on regional developments documents how modern economic growth first emerged in eighteenth-century Britain, and follows its spread to other parts of the world. Its origins can be traced back to earlier developments in north-west Europe, which began to break free from the Malthusian cycle of alternating periods of positive and negative growth after the arrival of the Black Death in the mid-fourteenth century. Europe thus experienced a Little Divergence as the rest of the continent continued to experience periods of shrinking as well as growing. Within Asia, there was also regional variation, with China and India experiencing negative growth during the eighteenth century while Tokugawa Japan caught up with China and then forged ahead, creating an Asian Little Divergence.

This article identifies two phases of rapid South East Asian economic growth and argues that both were linked to new opportunities in the global economy. During the first phase, stretching from the 1870s to 1929, South East Asia grew through vent-for-surplus trade in resource-intensive primary commodities. Just four of these – rice, rubber, tin, and sugar – accounted for most exports. In a second phase, under way by the early 1970s, a shift in factor endowments from surplus land to abundant labour attracted foreign multinationals in search of cheap labour and manufacturing for export, mainly to advanced economies. Through both phases of globalization-induced growth, trade served as its engine, but in neither did this lead to technical change becoming the chief source of expansion. Even in Singapore, low TFP growth is a chronic problem, while wealthier South East Asian countries like Malaysia and Thailand are in danger of being stuck in a middle-income trap.

In this chapter we survey the history of international finance spanning a century and a half. We start by characterizing capital flows in the long run, organizing our discussion around six facts relating to the volume and volatility of capital flows, measured in both net and gross terms. We then connect up the discussion with exchange rates and monetary policies. The organizing framework for this section is the macroeconomic trilemma. We describe where countries situated themselves relative to the trilemma over time and consider the political economy of their choices. Finally, we study the connections between international finance and economic and financial stability. We present consistent measures of growth and debt crises over the century and a half covered in this chapter and discuss how their incidence is related to those institutional and political circumstances, and, more generally, to the nature of the international monetary and financial regime.

This chapter explains how and why democracy, capitalism, and wealth have been correlated since 1870. It uses broadly the North, Wallis, and Weingast (2009) framework to demonstrate that representative political institutions and ready access to incorporation or similar enterprise forms have been mutually reinforcing and conducive to high living standards, widely shared. But linear development or convergence towards such ‘open access’ societies cannot be taken for granted. History suggests that the existence of workably attractive capitalist democracies is unlikely to prevent nationalist, revolutionary, and populist leaders continuing to fashion alternatives, whether by force or by democratic debate.

Economic growth in China prior to 1870 was kept in check by the performance of its agricultural sector, where diminishing returns to labour reduced effective demand, discouraged investment in manufacturing, and kept the urban share of population from growing. Economic recovery from the Wars of Transition (1644–1681) ended in 1740, when the rate of growth of total output – especially of food – fell below the rate of population growth. For the next century and a half, the economy shrank on a per capita basis. The resulting higher cost of capital relative to labour discouraged the adoption of labour-enhancing tools, even as the decline in the average size of farms raised demand for basic goods. Symptomatically, labour remained stuck in farming and a preponderance of manufacturing activity remained attached to the peasant household. For a period, the expansion of the frontiers coupled with labour intensification elsewhere were sufficient to feed the population, support trade, and fund the state. After 1800, however, environmental degradation took its toll and markets disaggregated. A period of rising social insecurity and political instability set in at the moment when China faced rising external threats from industrialized and industrializing nations.

By the beginning of the twentieth century, a combination of military and economic advantages had allowed imperial powers to expand the territory under their jurisdiction to include large parts of Asia, Africa, and the Middle East. This conquest of territory was both driven by and helped to facilitate the movement of people, goods, and capital in the decades leading up to World War I, with varied impacts on the development of both colonized countries and their colonizers. At the same time, imperial expansion also contributed means and motivation for the global conflicts which erupted during the twentieth century. After these conflicts, empires proved to be fragile. Little more than a half-century after they had reached their peak, most European empires had collapsed, and a new hegemonic order had emerged. This chapter examines the origins and legacies of empires, and asks why European countries lost their empires, despite persistent gaps in technological, military, and economic assets. It also examines the similarities and differences of the new order with the old.

African economies were globally integrated yet regionally autonomous. This chapter addresses volume and direction of slave trade, continental and regional export value, and theories of economic growth and enslavement. Details address the varying regional peaks in slave trade as related to warfare, population, regional social orders, and gender relations. The overseas diaspora grew to 10% of the African total of some 140 million. African economies felt the effects of imperial rivalries and global trade, notably in textiles. (Large-scale colonial rule came only after 1870.) The eighteenth century brought expanding overseas slave trade and its steady incursions into domestic economies. The nineteenth century brought a mix of economic changes. Silver became key to African currencies; peasant agricultural exports rose, but only the post-1870 exports of South African diamonds and gold exports exceeded slave-trade earnings. In the ‘second slavery’, African enslavement reached a mid-century peak, in parallel to current maritime Asian and New World plantations. Analysis of African economies benefits from growing collections of empirical data; contending theories on enslavement, the domestic economy, and overseas trade – developed over half a century of analysis – can be strengthened in global context.

This chapter examines relationships between demographic change and economic growth in the period 1700–1870. Traditional models of the demographic transition assumed that economic growth drove declines in mortality and fertility. However, such models cannot account for some of the main features of the transition. These include the early onset of initial mortality declines, widespread rises in fertility, and the weak correspondence between mortality levels and individual or national income at the beginning of the transition. Examination of pre-transitional demographic regimes indicates that mortality often rose with increasing urbanization and globalization, even as famine disappeared, and that social status gradients in survival were rare. Moreover, fertility was regulated, either within marriage or by limitations on marriage, in most societies, in contrast to the Malthusian view that mortality was the dominant form of population regulation. Early declines in major epidemic diseases allowed more modern gradients of health for wealth to emerge, and we argue that the causal relationships between economic growth and human capital were bi-directional, and driven in the early stages by mortality improvements. However, early gains in longevity were generally accompanied by rising fertility, leading to unprecedented population growth and unfavourable dependency ratios during the early phases of economic development.

This chapter shows how developments in military technology and strategy since the 1600s joined the political ambitions of states and merchants’ commercial interests to create European rules in Asia, Africa, and Latin America. Why did warfare in early modern times produce this outcome? Wars and empires had existed before. The European warfare outside Europe, the chapter suggests, could exploit more resources than the other major powers in Eurasia could, leading to decisive shifts in the balance of power. At the same time, trade entailed violence, whether we consider the Atlantic slave trade or the impact of European wars upon the actions of the Indian Ocean merchant firms. A final section asks how empires shaped economic change in the world; and shows that the emergence of empires had lasting effects on commercialization, though direct effects on living standards until 1870 were ambiguous.

This chapter considers the growth performance of western European countries since 1870, and relates this to the degree of openness. A theoretical explanation of why convergence is predicted by economic theory is presented and some statistics are presented on GDP per capita and the contributions of various factors to growth performance. Three periods are considered: 1870 until World War I; the interwar period; and after World War II. The first and the last are associated with globalization and convergence, whereas the interwar period witnessed increasing levels of economic isolation and lack of convergence. All western European countries are much richer today than they were in 1870, but some countries have performed much more strongly than others. Over- and underperforming countries, whose growth performances were markedly different from what might be expected from their initial levels of income, are highlighted, and possible interpretations suggested.

After the Meiji Restoration of 1868, Japan introduced Western institutions and new technologies. As the first Asian economy to make the transformation to ‘modern economic growth’, Japan’s development process was not smooth, and it took until the 1970s to achieve the goal of catching up with Western economies. From a supply-side perspective, the main drivers of economic growth to the 1970s were capital accumulation and TFP growth. From a demand-side perspective, private and government investment played a more significant role than private consumption. After the high-speed growth era, investment and TFP growth slowed down and exports took centre stage in propelling the economy forward. Further, especially since the 1990s, some features that played a key role in Japan’s remarkable economic performance, such as lifetime employment, the dual economy, and the high saving rate, held back Japan. Also, globalization and slow/negative growth in the working-age population have posed new challenges.

The British Industrial Revolution marked the beginning of modern economic growth. This breakthrough built upon earlier episodes of GDP per head growth with the economy remaining on a plateau between these episodes. Growth was accompanied by structural change, with the declining share of agriculture matched by the rise of services as well as industry. As a result, Britain improved its position relative to the rest of Europe (the Little Divergence) and also improved its position relative to the leading Asian economies (the Great Divergence). The chapter examines the proximate sources behind economic growth in Britain during 1700–1870, including investment, growth in the number of workers, and accumulation of human capital. Together, these factors accounted for about two-thirds of the increase in output growth, leaving the other third to be explained by total factor productivity growth. However, the ultimate sources of Britain’s growth lay deeper in geography and institutions. The chapter also examines the effects of the Industrial Revolution on living standards and the impact of trade and empire.